1 Must-Buy High-Yielding Dividend

BreitBurn Energy Partners turns oil fields into cold, hard cash. Photo credit: Flickr/Allison.johnson

BreitBurn Energy Partners (NASDAQ: BBEP  ) recently reported a terrific third-quarter. Oil and gas production hit a record, and is up 43% year-over-year. The company's focus on high-margin oil growth has really paid off, as it represents 61% of total production.

This oil-rich production is falling right to the bottom line. Last quarter the company reported that it was able to earn 30% more than it paid its investors in distributions. That said, if there was one concern about the company, it's the fact that it has put on a lot of debt this year. The company really stretched its limits when it made a big oil deal this summer that was funded completely with debt.

At the time of that deal, BreitBurn's units were under pressure; it was swept up in the same negativity as LINN Energy (NASDAQ: LINE  ) and LinnCo (NASDAQ: LNCO  ) when it was called "LINN Energy Junior", while its distribution was called a "mirage." Times certainly have changed, as LINN Energy seems to have basically been cleared to continue with business as usual. That has fueled a recovery in the price of LINN Energy's units and LinnCo's shares. It is a recovery that has also affected units of BreitBurn.

It was only a matter of time before BreitBurn took advantage of this recovery in its units to raise equity. In my third-quarter review, I said that one thing "investors should expect to see at some point in the future is an equity raise." That's why it comes as no surprise to see BreitBurn doing just that.

The company announced that it would offer to sell upwards of 17 million units, which could raise over $300 million for the company. If it sells that many units the distribution coverage ratio would drop from 1.3 times to 1.13 times, which is still very solid. In fact, to put that into perspective, LINN Energy's current coverage ratio is just at 1.0 times.

Another point of reference: BreitBurn's coverage ratio will still be higher than Vanguard Natural Resources (NASDAQ: VNR  ) , which has a ratio of 1.09 times. Vanguard is regarded as the most conservative of the three because it doesn't invest any capital to grow organically, instead acquiring its growth.

For BreitBurn to continue growing it needed to raise equity capital. The company only had about $300 million left on its credit facility, and its leverage ratio was just slightly below four times. BreitBurn has said repeatedly that it wants to get its leverage ratio closer to three times. By raising close to $300 million it should push its leverage ratio down to about 3.3 times, which, while not at its stated goal, is a much more comfortable ratio.

All of this is to say that BreitBurn's more than 10% distribution is rock-solid and one worth buying today. This is a company that has plenty of room to grow its payout, and, with a history of 14 straight quarters of distribution raises, BreitBurn's payout will keep going higher. Not only that: starting next year, it will move to a monthly distribution payment schedule. Add it all up, and BreitBurn is a must buy for investors looking for a rock-solid high yield.


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Read/Post Comments (14) | Recommend This Article (44)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 14, 2013, at 3:34 PM, crudeoiltrader wrote:

    We own BBEP in our COT fund and don't plan on trimming our position any time soon. Are also looking forward to the monthly distribution. Love it!

  • Report this Comment On November 14, 2013, at 6:00 PM, yastreb67 wrote:

    In any discussion of energy partnerships, for me, the 500 pound gorilla in the room that is never acknowledged is the giant pain energy partnerships are when tax time comes around. They don't seem to be bound by the same requirements that other companies are in terms of reporting actual income. So you go to your CPA in January or February, get all your paperwork in--minus whatever energy partnerships you own, because they don't bother to file until about April 1 or so--and then if you go ahead and file anyway to avoid being penalized, their late info to you draws an extra charge from the CPA for having to amend the original. To me, anyway, not worth the hassle or the small incremental gain.

  • Report this Comment On November 14, 2013, at 9:47 PM, irosenth100 wrote:

    Correct.

  • Report this Comment On November 14, 2013, at 9:53 PM, snapperreef wrote:

    Thanks has for the tax warning. I am a self tax preparer and I don't know if I/and or Turbo Tax

    will be able to handle one of these things. I had to fill out schedule K-1 s before and I know they are a pain.

  • Report this Comment On November 14, 2013, at 9:57 PM, pvictor wrote:

    Motley Food should specify whether dividends and distributions are reported on IRS Form 1099 or IRS Form K-1.

    Tax advantages accounts like Roth IRAs, $01-K, etc. income on form K-1's can in some cases result in a taxable event in the year -- have your CPA explain the mysterious acronym "UBTI" and its effect on the taxes you owe THIS year -- even for "forever tax free" Roth IRA's.

    As I understand it, income on form 1099 causes no problem in tax advantages accounts.

    I suggest that MF ass a "tax report form" data field to the MLP description.

  • Report this Comment On November 14, 2013, at 10:25 PM, Lokke wrote:

    Unfortunate typo, pvictor!

  • Report this Comment On November 15, 2013, at 11:11 AM, kiwi wrote:

    If you are Canadian and hold BBEP in a registered plan, you will still be charged a 30% withholding tax that cannot be used. Why? Because BBEP is an LP, not a corporation. Therefore this recommendation is not advised for Canadian registered plans

  • Report this Comment On November 15, 2013, at 6:22 PM, petrogold wrote:

    BreitBurn Energy:

    We cannot accept the suggestion being the high current P/E 75.60 or Estimated P/E 2013 :35.80.

    That is too risky to buy and hold. Despite High Yields this energy stock will not be profitable in the long run.

  • Report this Comment On November 16, 2013, at 11:06 AM, oldmandave1951 wrote:

    Why is the P/E so high at 381.70..?

  • Report this Comment On November 16, 2013, at 7:11 PM, TMFmd19 wrote:

    @petrogold & oldmandave1951 - PE ratio's of oil and gas companies are pretty useless. The E (earnings) number is affected by hedging gains or losses among other things. What you want to look at is its cash flow and its reserves. See this article for more on reserves: http://www.fool.com/investing/general/2013/07/03/1-number-br...

    Matt

  • Report this Comment On November 17, 2013, at 10:40 AM, NoFool1944 wrote:

    I did some research on LINN ENERY, and can find No reason to add it to my portfolio - unless you know something I don't...

  • Report this Comment On November 19, 2013, at 10:39 PM, pkluck wrote:

    LP's are a pain in the rump come tax time, I owned a few oil and gas LP a few years back and my federal tax return was 115 pages long, also they distribute income in various states which can make you liable to file multiple state tax returns.

  • Report this Comment On November 24, 2013, at 10:24 AM, tedwhit wrote:

    LP's have to file their taxes by March 15 so the k-1s are generally ready then. It does usually take a little time to get to you, but you still have 2 to 3 weeks before individuals have to file. If your CPA has everything else done on your return it doesn't take long to add a K-1. (And Turbo Tax handles it easily, I believe). If you don't like a long return e-file and have your CPA give you your copy as a PDF file. Passing on a good money making opportunity for the reasons cited doesn't make much sense to me. And, by the way, I'm a CPA and do these things all the time, as do most CPAs.

  • Report this Comment On November 30, 2013, at 9:15 PM, carenthusiast2 wrote:

    What do you mean referring to this stock as "rock solid"???

    Moody's rates this stock as B3, which they indicate is "highly speculative".

    I believe that your review is foolish in the WORST sense possible.

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